DEPARTMENT OF STATE REVENUE

Commissioner's Directive # 38 October 2009

The purpose of this directive is to provide guidance on refund procedures for taxpayers who are similarly situated to the taxpayers involved in the Tax Court case Riverboat Development, Inc. v. Ind. Dep't of State Revenue, 881 N.E.2d 107 (Ind. Tax Ct. 2008). The refund procedures apply only to timely filed claims for refund for taxable years beginning before Jan. 1, 2009. The directive also provides guidance on the taxability of income to nonresident shareholders/partners/members of an out-of-state pass-through entity, where the out-of-state pass-through entity is a shareholder/member/partner of an Indiana pass-through entity.

IC 6-3-2-2 was amended by HEA 1001-2009(ss) effective retroactive to Jan. 1, 2009, for taxable years beginning after Dec. 31, 2008, to provide that income from a pass-through entity shall be characterized in a manner consistent with the income's characterization for federal income tax purposes as provided in Section 1366(b) of the Internal Revenue Code for S corporations and Section 702(b) of the Internal Revenue Code for partnerships. The income shall be considered Indiana source income as if the person, corporation, or pass-through entity that received the income had directly engaged in the income-producing activity in Indiana. Income that is derived from one pass-through entity and is passed through to another pass-through entity does not change the characteristics or attribution provisions of the income.


IC 6-8.1-9-2 was amended by HEA 1001-2009(ss) to establish procedures to provide a refund to a pass-through entity's nonresident partners, shareholders, or members if the overpayment arises from a determination by the Department or a court that the person's pass-through income is not includible in the person's adjusted gross income derived from sources within Indiana.
Eligibility to make a claim for refund
To be eligible for a refund, the person must file a timely claim for refund with respect to the overpayment and the overpayment must:
Procedures for claiming a refund
A person applying for a credit or refund because of an overpayment of taxes is required to:


If the Department determines that a person's claim is valid and subsequently approved, the Department shall notify the person. If the amount of the credit is less than $5,000, the Department shall notify the person in writing that the person will receive a one-time payment for the claim.
If the Department determines that a person's claim is valid and the amount of the claim is greater than $5,000, the person will be required to claim the credit on the person's annual return for tax years beginning after Dec. 31, 2008. The person will be informed in writing of the procedures to follow when claiming the credit.
Application of refunds/carryforward credits
After the determination has been made (by the Department or a court) that a taxpayer overpaid tax, the Department shall first apply the overpayment to the person's liability for taxes that have been assessed and are currently due. The Department will then carry forward any remaining overpayment as a credit for listed taxes due in taxable years beginning on or after Jan. 1, 2009, and ending before Jan. 1, 2019. If the person does not have sufficient liability against which to credit all the remaining overpayment in taxable years beginning on or after Jan. 1, 2009, and ending before Jan. 1, 2019, the taxpayer is not entitled to have any part of the remaining overpayment refunded, applied, or credited to the person's tax liability.
In some instances, the Department (or court) may make a determination that the taxpayer's RDI claim for refund for a particular year is valid after the taxpayer has already filed a subsequent year's return on which tax is reported and paid and for which no anticipated RDI-related credit has been taken. Had the taxpayer's RDI-related refund claim been approved prior to the subsequent year's filing, the taxpayer would have been able to apply an RDI credit to that year's return, the first available carryforward year. Under these circumstances, the Department will allow a retroactive application of the RDI credit to that already-filed year and issue a refund for the overpayment now due from the application of the credit to that one year. The refund will be issued within 90 days of the date the Department (or court) makes its determination. Any remaining overpayment credits resulting from the approved RDI-related refund claim will not be refunded but may be carried forward and applied by the taxpayer to subsequent carryforward years available through 2018.

Reporting requirements for carryforward credits
The person claiming an approved credit shall include annually with his/her return a schedule approved by the Department listing the total amount of credits approved by the Department, the amount of credits applied in each of the previous taxable years, and the amount of credits applied in the current taxable year.
A person claiming a credit or refund shall submit any filed return(s) with the Department that identify, under penalties of perjury, the home state or jurisdiction where the income subject to the credit or refund was reported as income attributable to that state or jurisdiction. IC 6-8.1-9-2(c)(3) states "A person that receives a refund or credit under this subsection shall file a report with the Department in the form and in the schedule specified by the Department that identifies, under penalties of perjury, the home state or other jurisdiction where the income subject to the refund or credit was reported as income attributable to that state or jurisdiction."

A nonresident shareholder/member/partner of an Indiana pass-through entity is not eligible for a refund or credit if there is not an intermediate out-of-state pass-through entity in which the individual is a shareholder/member/partner.
A shareholder/member/partner who resides in a state that does not impose an income tax on the distribution from a pass-through entity is not eligible for a refund because the person has not reported income to the state of residence. States that do not have an income tax include Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. New Hampshire and Tennessee tax only certain investment income.

If the taxpayer's claim for refund is denied, the person will receive an Order Denying Refund with an attached explanation providing the reason for denial.
The Department shall, if requested by the taxpayer, hold a hearing on the claim for refund for purposes of obtaining and considering additional evidence. For purposes of requesting a hearing, the taxpayer must attach such request to a copy of the original claim for refund along with the Order Denying Refund and submit the information to the Department.
After a hearing date has been confirmed, failure to appear will result in a denial of the claim where the taxpayer has failed to provide sufficient evidence to verify the claimed overpayment. The taxpayer will receive a Final Order Denying Refund noting such failure to appear with an attached explanation of the Department's reason for denial.
If, subsequent to the hearing, the Department still denies the claim, the taxpayer will receive a Final Order Denying Refund with an attached explanation of the Department's reason for denial.
Any taxpayer in receipt of an Order Denying Refund or a Final Order Denying Refund has a statutory remedy for appeal with the Indiana Tax Court as provided in IC 6-8.1-9-1(c), which states:
The sole remedy for an appeal of the Department's decision is with the tax court.

Posted: 10/28/2009 by Legislative Services Agency